The Sherwin-Williams Company (SHW) 2024 Q2 Earnings Call Summary

Optimistic Highlights

• Strong Quarter Performance: Sherwin-Williams reported a strong quarter with double-digit growth in diluted earnings per share and EBITDA, driven by the Paint Stores Group. Gross margin expanded across all segments.

• Capital Allocation: The company returned $613 million to shareholders through dividends and share repurchases, marking a 57% increase year-over-year.

• Market Share Gains: Sherwin-Williams is confident in continuing to win new accounts and increase share of wallet, particularly in the residential repaint market, despite a down market.

• Investment Returns: Returns from investments made in the latter half of the previous year are becoming evident, particularly in dedicated sales reps for the residential repaint sector.

• Full-Year Earnings Outlook Increase: Based on the performance in the first half and current visibility, Sherwin-Williams has increased its full-year earnings outlook.

Pessimistic Highlights

• Consumer Brands Group Underperformance: Sales in the Consumer Brands Group were below expectations due to softer market conditions, particularly in the North American DIY market.

• Challenging Macroeconomic Environment: The global macroeconomic environment remains uneven, impacting demand across various segments.

• Raw Material Cost Moderation: While raw material costs have moderated, they continue to impact the company's cost structure and pricing strategies.

• DIY Market Pressure: Inflation, depleted savings, and household debt are pressuring consumers, affecting spending in the DIY segment.

• Project Delays: Delays in CapEx projects and insurance claims have impacted the property management and auto refinish segments, respectively.

Company Outlook

• Consolidated Sales Growth: For the full year 2024, consolidated sales are expected to be up by a low-single digit percentage, with the Paint Stores Group and Performance Coatings Group maintaining their previous sales guidance.

• Adjusted EPS Increase: The company has increased its full-year adjusted EPS guidance to a range of $11.10 to $11.40 a share, an 8.7% increase at the midpoint over the prior year.

• Raw Material Costs: Expectations for raw material costs are to remain flat in the second half of the year.

• Strategic Focus: Sherwin-Williams remains focused on executing its strategy, particularly in winning new business and share of wallet gains, despite not expecting significant market help in the back half of the year.

Q & A Highlights

• Q: Can you discuss the quarter in paint stores and the impact of weather conditions? (Vincent Andrews, Morgan Stanley)

  A: We don't hide behind weather but acknowledge it affects paint application conditions. We're focused on controllables and are confident in continuing to take market share, especially in residential repaint. (Heidi Petz)

• Q: How should we think about your long-term gross margin opportunity? (Chris Parkinson, Wolfe Research)

  A: We're not discussing specific long-term targets today but will focus on our strong Q2 performance and our strategy for driving profitable growth. (Allen Mistysyn)

• Q: Can you frame the share gain opportunity looking into '25 and '26? (Arun Viswanathan, RBC Capital Markets)

  A: New customers tend to value our premium products and services, which is positive for mix. We're confident in our momentum and strategy for market share gains. (Heidi Petz)

• Q: Could you talk about your regional performance in paint stores? (Jeff Zekauskas, JPMorgan)

  A: Our Southwest division led in performance, partly due to competitor closures. We don't typically give detailed regional commentary. (Jim Jaye)

• Q: On the gross margin front, what were the big drivers this quarter? (John McNulty, BMO Capital Markets)

  A: Moderating raw materials, better price realization, and mix were key drivers. We expect gross margin expansion to continue in the second half. (Allen Mistysyn)

• Q: What happens if demand gets worse in the second half? (Michael Sison, Wells Fargo)

  A: We're prepared for any environment and focused on share gains, especially in residential repaint. We're realistic and aggressive in our pursuit of new business. (Heidi Petz)

• Q: How does the Pros Who Paint business perform relative to the overall segment? (Adam Baumgarten, Zelman)

  A: Pros Who Paint is under some pressure in North America but remains a critical part of our strategy for long-term growth and market share gains. (Heidi Petz)

• Q: Can you discuss the $32 million other income net recorded in the quarter? (Michael Leithead, Barclays)

  A: This includes credits from environmental, FX, and gain on sales, contributing to a net $0.12 tailwind. We expect these lines to normalize in the second half. (Allen Mistysyn)

• Q: What's your outlook for key performance coatings verticals? (Patrick Cunningham, Citi)

  A: We're gaining share in packaging outside the U.S. and expect improvement in the U.S. Coil and auto refinish are also areas of positive momentum. (Heidi Petz)

• Q: Can you speak to DIY demand trends? (Kevin McCarthy, Vertical Research Partners)

  A: DIY in our stores is less sensitive to price increases compared to the consumer segment, where affordability issues are more pronounced. (Heidi Petz)

• Q: How are raw materials trending, and what's the outlook? (Gregory Melich, Evercore ISI)

  A: Raw materials were down mid-single digits year-over-year in Q2, with expectations for them to be flat in the second half of the year. (Allen Mistysyn)

• Q: Can you discuss the impact of consumer affordability on different segments? (Ghansham Panjabi, Baird)

  A: Affordability impacts are more pronounced in the Consumer Brands segment. In Paint Stores, value-conscious customers still expect premium service. (Heidi Petz)

• Q: What led to the higher fixed cost absorption in consumer? (Steve Byrne, Bank of America)

  A: Higher fixed cost absorption is due to updating our cost standards to match higher conversion costs, impacting Consumer Brands Group's operating profit. (Allen Mistysyn)

• Q: How is Res Repaint performing, and what's the outlook? (Josh Spector, UBS)

  A: Res Repaint's strength is sustainable, with significant market share gain opportunities. We're making the right investments at the right time. (Heidi Petz)

• Q: What's the outlook for Performance Coatings Group's general industrial demand? (Michael Harrison, Seaport Research Partners)

  A: North America is expected to be less of a headwind, with Asia Pacific and Latin America showing positive trends. Share gains are a focus. (Allen Mistysyn)

• Q: Can you clarify pricing trends and expectations? (Duffy Fischer, Goldman Sachs)

  A: Price increase effectiveness improved throughout Q2, and we exited the quarter at our targeted rate. We expect low-single-digit price increases in the second half. (Allen Mistysyn)

• Q: What's the cadence of earnings in the back half, especially for CBG margins? (David Begleiter, Deutsche Bank)

  A: CBG margins in the second half will depend on sales volume. We expect to build on the current margin level with volume leverage. (Allen Mistysyn)

• Q: Can CBG margins improve to mid to high-20s with volume leverage? (Aleksey Yefremov, KeyBanc Capital Markets)

  A: Our expectation for CBG is high teens to low 20s operating margin, with volume being the #1 driver of margin performance. (Allen Mistysyn)

• Q: Is DIY mostly interior, and was its growth unusual this quarter? (John Roberts, Mizuho)

  A: DIY growth in our stores is less affected by weather, with customers switching between interior and exterior projects based on conditions. (Allen Mistysyn)

• Q: Why is there no price sensitivity in residential projects in the Paint Stores Group? (Chuck Cerankosky, Northcoast Research)

  A: The specialty paint store model attracts customers willing to pay for premium products and services, differentiating from the more price-sensitive consumer segment. (Heidi Petz)

• Q: What's the outlook for raw materials in Q4? (Aron Ceccarelli, Berenberg)

  A: Raw material costs are expected to be flat year-over-year in Q4. (Allen Mistysyn)

• Q: Can you discuss the profitability of new accounts in Res Repaint? (Laurence Alexander, Jefferies)

  A: New accounts tend to value premium products and services, which is positive for mix and profitability as we continue to gain market share. (Heidi Petz)